A recent study by the Brookings Institution regarding biotechnology (as reported in New Jersey Business News, July 2002) shows areas of the mid-Atlantic losing ground to California, Washington and New England in terms of recruiting biotechnology and technology companies.
Boston and San Francisco have a high concentration of venture capital firms, which explains much of the growth in these areas.
This has the mid-Atlantic and other regions countering by putting their best foot forward in an attempt to lure technology businesses.
One way to do so is with research incentives.
Different Credits From Different states
In the United States, the predominate type of research and development credit allows a fraction of expenses over and above some base expenditure level to be used to reduce state income taxes. This base is usually the average of the prior few years of expenditures.
New Jersey allows such a credit, which is equal to 10 percent of the excess of qualified research expenses for the tax year over the base amount, plus 10 percent of basic research payments. Both credits follow the provisions of IRC Section 41.
There is a maximum credit of 50 percent of the tax otherwise due. Unused credits may be carried forward for seven years. The taxpayer must claim the federal credit in order to be eligible for the New Jersey credit.
North Carolina and Maryland have their versions of this credit, as well.
In North Carolina, taxpayers claiming a federal income tax credit for increased research activities are allowed a credit equal to 5 percent of the state's apportioned share of research expenditures. Taxpayers claiming the alternative incremental credit for federal purposes can also claim a credit equal to 25 percent of the state's apportioned share of such expenditures.
North Carolina has only a five-year carry forward for unused credits. Again, the provisions of IRC Section 41 are followed.
Maryland law allows either a credit of 3 percent of the total research and development expenses, or 10 percent of the expenses during a three-year base. A difference in Maryland is that taxpayers can offset up to 100 percent of their corporate net income tax. Also, the state offers a carry forward of unused credits for up to 15 years. For startup companies, R&D expenditures qualify for a 10 percent credit in the first year.
In Virginia, localities can create technology zones with an ordinance. These governments then can provide incentives for technology companies.
Some states take advantage of natural resources in attracting biotech and technology businesses. Other states have to make a winning move by offering more lucrative incentives to these types of companies.
With today's tough economic times, it's the states offering potential savings that may just win out.
Paul Westbrook is senior tax manager for Mintax, a company that specializes in site selection and government incentives for new and expanding businesses based in East Brunswick, N.J. He can be reached at (732) 723-9000.
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